It is not easy to engineer new derivative product solutions in Vietnam. With many uncertainties and restrictions existing on the market, the State Bank of Vietnam has the final say in what products can and cannot be admitted to the market - and the regulator likes to err on the side of caution.
Yet despite these challenges, this year's winner of Asia Risk's Vietnam House of the Year Award, Techcom Bank, has shown that it can punch above its weight to not only woo domestic clients but also structure solutions for international investors, including a large Korean conglomerate that chose to forego the services of its regular banks in favour of those that Techcom can offer. A number of global banks also rely on Techcom for pricing products on the Vietnam market.
"Our in-house technology platform for both forex and commodities allows us to offer competitive prices to clients. Our ability to warehouse risks and being able to access liquidity through our growing network of foreign partnerships also helps with the pricing," says Son Phan Thanh, Techcom's head of markets.
Techcom is a joint-stock commercial bank, meaning it is owned by shareholders who also have some limited exposure to its liabilities.
The fact that Vietnam is still considered a niche country for investment purposes means that foreign banks remain selective about which counterparties they choose to deal with. Techcom is keen to make sure that its bank is positioned centrally on the map.
"We have been travelling a lot to Singapore and other regions to meet these counterparties and raise the profile of our bank," says Thanh. "Counterparties are often less familiar with Vietnam than they are with other Asian countries, so we have to raise awareness. It's all about being prepared. We need to create this awareness and establish credit lines in advance, so that we can use these relationships to strengthen market risk management and provide favourable pricing to our clients."
This partnership with foreign players, as well as its own in-house warehousing capabilities, has allowed Techcom to offer comparatively attractive prices for its clients. This is what won the bank the Korean deal.
"It is not all that usual for a Korean client to come to a Vietnamese bank, but because we were able to demonstrate our pricing capability and a good knowledge of the local market, they decided to go with us," says Thanh.
The client's needs were simple enough. They had a long-term exposure to a 35 million US dollar-denominated loan, which they had taken out to fund their expansion into Vietnam. They needed to find a cost-effective way of bridging the mismatch between repayment on this loan and their income stream. At the time the hedge was taken out, the loan had two years left to run.
"Price was very important to the client. We gather that at least four of our competitors were also pricing them, but in the end they went with us," says Thanh.
The strength of the deal wasn't only on price, though. It was also crucial for Techcom to fully understand the needs of the client, an organisation that the bank had not dealt with previously. Techcom enlisted its team in Korea to help with this.
Understanding client needs and knowing the local markets helped with the pricing. Techcom advised the customer that it should enter into a cross-currency swap contract, on which it would pay a fixed dong amount in return for a floating US dollar payment benchmarked against Libor. However, using a single cross-currency swap to provide tenor over the entire two-year duration of the loan turned out to be more costly than providing a one-year swap, which could then be rolled over after 12 months. This also matched the client's view of the likely depreciation of the dong against the dollar.
Thanh says that, although price was important, "it was the complete package that gave us the extra edge to win that trade".
Another transaction that shows the bank's ability to seamlessly combine expertise in the derivatives market with a broad network of partners was a $17 million iron ore hedge that the bank executed for a local steel production company. This equated to nearly 400,000 tonnes of iron ore.
With the price of commodities having fallen for much of 2015, the client was worried about a sudden spike in the price of iron ore at the start of 2016. The difficulty with the transaction is that iron ore hedging is a new concept in Vietnam and, according to Techcom Bank, prior to 2016 no hedging of this type of product had been carried out in the country.
"We needed to work closely with the client to make sure that they understood the market mechanics and to help them select the derivative solution that was appropriate for their business model. We are one of the first banks to have done research on this type of contract," says Thanh.
The hedge, which was for an initial six-month period, was monthly settled. The client now plans to use Techcom to hedge for iron ore demand in 2017, which will be of the order of one million tonnes: a testament to both the price and the level of service that the bank brought to the transaction.